Why investing in real estate over paper wealth makes sense

Joseph Ng'ang'a is an investor based in Nakuru County running a borehole drilling company.

He has an interest in real estate and has invested in rental properties, both commercial and residential, as well as in land for speculative purposes.

He has less interest in paper wealth, such as investing in stocks, after seeing his investment go up in smoke when one company he invested in saw its stock price fall, and investors counted their losses.

The reason for his interest in real estate is that he's assured the investment will appreciate over time, rather than spreading the risks in the stock and money markets, where stocks can crash or be wiped out, or a company can delist from the bourse market, taking investors' money with it.

He's closely watching the Middle East crisis, where both the US and Iran are locked in a brinkmanship with no deal in sight, as oil prices surge. 

"The best time to take the money sitting in your bank account and invest it in real estate is now, before the Middle East crisis balloons into a global recession," he says.

His observation is informed by the continued US Navy blockading of the Strait of Hormuz, the likelihood of Israel and the US resuming hostilities with Iran, and the possibility that Iran bombs refineries in Gulf Cooperation Countries and factories producing critical commodities such as fertiliser.

The Houthis, in support of Iran, fire on ships transiting another critical choke point, the Bab al-Mandeb Strait, and could trigger a global economic crisis. In addition, insurers have increased shipping premiums, forcing shippers to pass costs on, and with ships rerouting to avoid the Middle East theatre, commodity prices could skyrocket.

"What I learnt about keeping money in the bank in times of inflation is how it erodes in value, but investing in assets like land appreciates its value," he says.

And he's right. When the shilling was in free fall, after this regime came to power in 2022, many Kenyans rushed to buy US dollars to cushion themselves against a weaker shilling. At one point, even the Central Bank reported a shortage of dollars, as Kenyans were hoarding them.

Financial experts foresee a situation in which the dollar may replace the local currency in the event of hyperinflation, as the local currency will become valueless.

That million shillings in a bank account could see its value diminish by as much as half, with its purchasing power greatly eroded. On the flip side, that quarter of an acre will rise by as much as the shilling is shrinking at.

"If you were to see the bank account of a millionaire or billionaire, you'd be shocked to find that their accounts don't hold millions or billions," says Fred Nguyo, a personal banker.

Most have invested in assets or shares that they can easily convert into cash if the need arises. They own commercial buildings, rental properties, farmland, and shares in companies such as those in the lumbering, mining, and transportation sectors. Others are banks that lend to microfinance companies and earn impressive returns.

On real estate, he says it's a smart move to invest in that sector.

"Money loses value with inflation, but real estate will not. Land for food production will be needed. Space for storage, such as warehousing or godowns, will be needed. Buildings for both commerce and residence will be needed. By the time the world is pulling through from recession, the value of such assets will be high, but the currency will be battered or weakened against other currencies," he says.

Hyperinflation, for example, would see Kenyans trusting the greenback more than the local currency. Zimbabwe and Argentina are countries that went through the same but use the dollar over their respective currencies.

"This shows you that money in your bank account earning little interest is not working for you, compared with that asset generating your primary and passive incomes."

Other ways to make quick money include buying rundown real estate assets, such as a house in a state of neglect, renovating it, and selling it for good margins.

"You'll see a serious investor taking a loan to purchase such a unit, carrying out major renovations, and within a short time, the value of the unit goes up. That investor puts it on the market, repays the loan, and still makes a good profit without touching his savings or selling any other of his assets," he says.

Right now, if you buy land in less developed areas for a song and begin developing it – say you bought an eighth of an acre for Sh650,000 somewhere in the rural hinterland – in 10 years, its value would be millions.

"That Sh650,000 in the same timeframe will look like a quarter of a deposit for the same land. The asset value had more than tripled, and the currency value had depreciated owing to inflation."

The land too could be earning you passive income, like leasing it to a telco for a telecommunications mast, a business concern to erect a factory or a godown, or converting it into a car park compared to that paper wealth or the inflation-reducing purchasing power of that money sitting in bank vaults.